In 1972, Jack Trout and I wrote a series of articles for Advertising Age called “The positioning era cometh.” One of our key concepts: The line extension trap.
“Just because a company
That was 39 years ago. While positioning has become famous, the line-extension trap and other principles of positioning are mostly ignored.
Regretfully, line extension is still the preferred marketing strategy for many companies. Take Amazon.com, “Earth’s biggest bookstore.” It didn’t take long for Amazon move onto bigger and better things. Computers, electronics, home & garden supplies, groceries, health & beauty aids, toys, clothing, jewelry, sports equipment.
By the end of 2010, Amazon had been in business for 17 years and had accumulated revenues of $136.3 billion.
And how much money has Amazon made in the past 17 years? Just $1.3 billion, or a net profit margin of less than 1 percent. (That kind of track record would many CEOs fired.)
In spite of its less-than-spectacular past, Amazon has a bright future and is likely to continue to be profitable for decades to come. Which will lead many marketing gurus to the conclusion: Amazon proves that line extension is a successful marketing strategy.
Or does it?
What if Amazon had launched multiple brands?
What if Amazon had followed up its book success with the launch of product specific websites, like a website for computers? And one for electronics? And one for home & garden supplies? And one for groceries? And one for health & beauty aids? And one for toys? And one for clothing? And one for jewelry? And one for sporting equipment? And one for shoes? (Instead of spending $1.2 billion to buy Zappos.com.)
Look at the success of Kindle, one of the few standalone brands Amazon has launched. Conventional wisdom would have the Sony e-reader the market leader.
Sony, the world’s best-known consumer brand, combined with the company’s electronic leadership should have produced an ebook winner. But it didn’t.
If Amazon.com, Inc. had developed multiple websites with different brand names, where would the company be today, financially speaking?
In my opinion, the company would be financially much more like multiple-brand companies. Kimberly-Clark (net profit margin in past 10 years: 10.4 percent.) PepsiCo (12.9 percent.) Colgate-Palmolive (13.1 percent.) Procter & Gamble (13.6 percent.) Coca-Cola (20.0 percent.)
Nor would a multiple-brand approach undermine concepts like Amazon Prime, unlimited two-day shipping for $79 a year. A second or third brand does not live in a vacuum. Consumers tend to associate a brand with a company. Lexus is associated with Toyota. Chevrolet with General Motors. Jeep with Chrysler.
Amazon’s various brand-name websites could have been associated with the Amazon company name. Much like the iPod, the iPhone and the iPad are associated with the Apple company name.
What if IBM had launched multiple brands?
Take IBM, one of the most successful companies of the 20th century. “The colossus that works: Big is bountiful at IBM,” said the cover story of the July 11, 1983 issue of Time magazine.
By 1985, IBM had profits of $6.6 billion, the largest any company anywhere in the world had ever achieved, and a net profit margin of 13.1 percent. That year, according to Fortune magazine, IBM was the most-admired company in America.
But what happened in the next 25 years?
Last year, IBM revenues were $99.9 billion, up 99 percent over the company’s 1985 revenues of $50.1 billion. But that’s less than the 103-percent rise in inflation over the same period.
Compare IBM in the last 25 years with a couple of other high-tech companies.
Hewlett-Packard . . . Up 1,838 percent
Intel . . . . . . . . . . . . . Up 3,096 percent
Apple . . . . . . . . . . . . Up 3,301 percent
IBM is like Sony, Xerox and other high-tech single-brand companies that start out with an enormous technological advantage. The mainframe computer in the case of IBM. The transistor radio at Sony. The plain-paper copier at Xerox.
As the years roll by and the business booms, the brand becomes incredible strong. But management refuses to associate the category with the brand. It’s as if the brand exists in isolation. So they continue to launch line extensions which ultimately put a ceiling on sales and profits.
What if Xerox had launched multiple brands?
Among 20th century high-tech brands, Xerox was right up there with IBM. But like IBM, Xerox failed to capitalize on its position.
Both companies seemed to be confused about the best time to launch a second brand. The best time to launch a second brand is when the core brand is at its zenith. But that’s exactly the time when management thinks the opposite. “Our brand is so powerful it can be infinitely expanded.”
Back in the 1980s, Xerox introduced a complete line of printers, fax machines, personal computers and workstations. All under the Xerox name and all marketed under a “Team Xerox” strategy. It was a disaster.
Since then Xerox has been moving sideways while many other high-tech companies have been expanding rapidly. Ten years ago, Xerox sales were more than double that of Apple.
Last year, Apple’s sales were more than triple that of Xerox. And furthermore, Apple made 23 times as much after-tax profits as Xerox.
Companies like Dell, Polaroid, Digital Equipment and Kodak have followed a similar single-brand strategy. At some point in time, a single-brand company hits a wall where further growth is difficult or impossible.
Kodak in 1996, according to Interbrand, was the fourth most-valuable brand in the world. Today, it’s not in the top 100.
Actually, Kodak is still the world’s most-powerful photographic-film brand, if you happen to want to buy photographic film. And Polaroid is still the most-powerful instant-photography brand. And Xerox is still the most-powerful copier brand.
A brand stands for a category. And if the category declines, so does the brand. The world’s most valuable brand is Coca-Cola, worth $70.5 billion. But per-capita cola consumption in the U.S. since 2003 has been declining about 2.2 percent a year. Which accounts for Coca-Cola’s flurry of new product introductions, including the purchase of Vitaminwater-maker Glaceau for $4.1 billion.
In theory, a company should be able to grow forever, as long as it continues to launch new brands to dominate new categories.
What if the media conglomerates had launched new Internet brands?
What accelerates the need for new brands is the arrival of a new category. And the more revolutionary the new category, the more urgent the need for new brands.
Take the Internet, the most-revolutionary new category since the arrival of the personal computer.
You might think the sophisticated, all-powerful media conglomerates would have jumped on the Internet with new brand names. But they didn’t.
Every media conglomerate line-extended its existing brands on the Internet. The New York Times, The Wall Street Journal, Fortune, Forbes, Business Week, etc.
When Newsweek plus Newsweek.com is worth $1.00 and The Huffington Post is worth $315 million, you know that something is wrong with traditional line-extension thinking.
(I should mention The Daily, recently launched by News Corporation as the first national publication created for the iPad. But it’s awfully late in the game for a media conglomerate to be planning an Internet-only brand. Furthermore, The Daily’s generic name is going to be a serious handicap.)
One of the next revolutionary developments is going to be the electric car. And guess what? The sophisticated, all-powerful car conglomerates are following the same line-extension strategy. The Chevrolet Volt, the Nissan Leaf, the Ford Focus Electric, the Audi e-tron, the Fiat 500 EV, the Honda E V.
So who will win the electric-car sweepstakes? My bet is on the Tesla or one of the other new electric-car brands. Or even possibly Toyota if it can successfully transform its Prius hybrid brand into an all-electric brand.
What if Virgin had launched multiple brands?
Richard Branson has had an enormous impact on the marketing community. “If Virgin can do it, why can’t we?” That’s the attitude of many marketing people worldwide. But few marketing people seem to have dug into the actual sales results of Virgin’s many line extensions.
“Virgin has created more than 300 branded companies worldwide,” according to the group’s website. “Global branded revenues in 2009 exceeded £11.5 billion (approx. US$18 billion.)”
Most of these 300 companies are private companies, so it’s impossible to tell whether they are successful or not. But I was able to track down eight of the Virgin companies that reported revenues and profits. (Virgin Active, Virgin Blue, Virgin Media, Virgin Mobile Telecoms, Virgin Money, Virgin Rail, Virgin Unite and Virgin Wine.)
These eight companies reported sales of $10.4 billion in a recent year and net profits after taxes of . . . well in total they didn’t make any money. They actually lost $429 million.
So if Virgin is a powerful brand, those 292 other companies that did some $7.6 billion in sales ($18 billion minus $10.4 billion) must be incredibly profitable. But I doubt it. When was the last time you saw someone order a Virgin cola, a Virgin vodka or a Virgin energy shot?
The most successful of those 292 other companies is probably Virgin Atlantic. But how profitable is the airline? In its last financial year, according to Virgin Atlantic’s website, “The airline made £46.8m (excluding Virgin Nigeria) pre-tax profits before exceptionals.”
That’s $75 million before taxes, before Virgin Nigeria and before exceptionals. Compare that with Southwest Airlines which made $459 million last year after taxes and after exceptionals.
Like Steve Jobs, Richard Branson is a PR genius, but as a marketing expert, he’s no Steve Jobs.
Multiple brands vs. multiple products.
Most companies are multiple-product companies. “Let’s market everything under a single brand name,” goes the thinking. “That way we can save money and still build a strong brand. Probably an even stronger brand than if we spread our marketing dollars over multiple brands.”
That’s the line-extension trap. Logical, sound, sensible and, in the long run, wrong.
Counteracting the line-extension trap was the unifying idea behind positioning thinking. If the objective of a positioning program is to “own a word in the mind,” then a line extension is in direct conflict with that objective.
IBM owns the word “mainframe” computer in the prospect’s mind. So why did the company introduce an IBM “personal” computer? A thousand-dollar product is not in the same category as a million-dollar product.
No problem, thought the folks at IBM. We’ll just consider the category to “computers” in general. A misguided idea.
Nothing, but nothing is as strongly embedded in consumers’ minds as categories, narrowly defined. Consumers think in terms of categories even though they might express their desires in terms of brands.
And as time goes on, categories get narrower and narrower as competitors chip away at the broad category, creating niche categories they can dominate.
Instead of getting bigger, categories shrink and get smaller. When you line extend your brand, you are moving against the category tide. So before you launch your next line extension, ask yourself a simple question.